United States: Medicare's Jurisdictional Bar And The Bankruptcy Code

One of the many issues that hospitals and other health care
providers face when they become insolvent is addressing their
Medicare provider agreements and the prohibitions contained within
the Medicare Act. There is currently a split among the circuits
regarding whether or not § 405 (h) of the Medicare Act bars a
bankruptcy court from adjudicating Medicare-related issues. This
topic is critically important given the ongoing distressed state of
the health care industry and continuous bankruptcy filings by
health care providers. The circuit courts have developed three
different approaches to these issues: Several circuit courts have
aligned themselves with one form of interpretation, one circuit has
held to the contrary, and a recent decision from the First Circuit
has taken a much different approach. Further, the recent filing of
a petition for writ of certiorari to the U.S. Supreme
Court might finally lead to a resolution of these various circuit
approaches.

To be eligible for payments from Medicare and/or Medicaid,
health care providers must enter into "provider
agreements" with federal and state governments. These provider
agreements provide for reimbursement to health care providers who
provide medical services to Medicare and Medicaid
patients.1 However, in order to qualify, health care
providers must satisfy certain regulatory
requirements.2 If a health care provider fails to
comply and there is a finding of immediate jeopardy to patient
safety, the Department of Health and Human Services (HHS) may
terminate the provider agreement without a pre-termination
hearing.3 Terminating the provider agreement
immediately ceases the flow of income to the provider, which often
creates a cash crisis. Medicare is a large — if not the
largest — source of income for many providers. For this
reason, providers (like many other cash-strapped entities) may turn
to bankruptcy to reorganize and hopefully stave off this loss of
income.

However, the power of bankruptcy courts to adjudicate issues
involving the Medicare Act is unclear. In 2016, the Eleventh
Circuit joined the Third,4 Seventh5
and Eighth6 Circuits in holding that bankruptcy (and
district) courts lack jurisdiction over Medicare claims. The
Eleventh Circuit expressed concerns that a bankruptcy court lacks
"institutional competence or technical expertise of [the HHS]
to oversee the health and welfare of nursing home patients or to
interpret and administer a 'massive, complex health and
safety' program such as Medicare."7 It
appears that only the Ninth Circuit holds that § 405 (h)
permits bankruptcy court jurisdiction over Medicare claims under 28
U.S.C. § 1334.8 The First Circuit chose not to
"add its voice to the circuit split on this particular
issue" and instead chose to decide the matter "on
narrower grounds," finding that the termination of the
provider agreement was not a violation of the automatic stay based
on the police and regulatory power exception under § 362 (b)
(4) of the Bankruptcy Code.

This legal conflict stems from an amendment to § 405 (h) of
the Medicare Act.9 In the aforementioned Third,
Seventh, Eighth and Eleventh Circuit cases, the health care
providers argued that a plain reading of § 405 (h) of the
Medicare Act did not preclude district or bankruptcy courts from
having jurisdiction over Medicare-related claims. In fact, the
Ninth Circuit adopted this very position.10 However,
the Third, Seventh, Eighth and Eleventh Circuit Courts found that
although the plain reading of § 405 (h) did not preclude
bankruptcy court jurisdiction under 28 U.S.C. §§ 1332 and
1334, it was a merely a result of a codification error. Currently,
42 U.S.C. § 405 (h) provides for the following:

(h) Finality of Commissioner's decision. The findings and
decision of the Commissioner of Social Security after a hearing
shall be binding upon all individuals who were parties to such
hearing. No findings of fact or decision of the Commissioner of
Social Security shall be reviewed by any person, tribunal, or
governmental agency except as herein provided. No action against
the United States, the Commissioner of Social Security, or any
officer or employee thereof shall be brought under section 1331 or
1346 of title 28 to recover on any claim arising under this
subchapter.

Although this section on its face does not seem to bar
bankruptcy jurisdiction under § 1334 of title
28,11 as it specifically references only
§§ 133112 and 1346 of title
28,13 the pre-amendment language of § 405 (h)
of the Medicare Act specifically barred bankruptcy court
jurisdiction. Originally, § 405(h) of the Medicare Act
provided for the following:

(h) The findings and decisions of the Board after a hearing
shall be binding upon all individuals who were parties to such
hearing. No findings of fact or decision of the Board shall be
reviewed by any person, tribunal, or governmental agency except as
herein provided. No action against the United States, the Board, or
any officer or employee thereof shall be brought under section 24
of the Judicial Code of the United States to recover on any claim
arising under this title.

As the Eleventh Circuit stated in Fla. Agency for Health
Care Admin v. Bayou Shores SNF LLC (In re Bayou Shores SNF
LLC), it is "undisputed that under the original text of
§ 405 (h), bankruptcy court jurisdiction over Medicare claims
was barred."14 The issue arose in 1948 when
§ 24 of the Judicial Code was re-codified under title 28 of
the U.S. Code and split the different types of jurisdiction into
multiple sections, including §§ 1331, 1332, 1334 and
1346.

For years, § 405 (h) of the Medicare Act still referred to
§ 24 of the Judicial Code, and thus § 405(h) of the
Medicare Act was amended in 1984 to reflect the new jurisdiction
section under title 28.15 When Congress eventually
amended § 405 (h) to address this issue, it failed to include
§§ 1332 and 1334 and instead only referenced §§
1331 and 1346. Despite this omission, the legislative history
indicates that the amendment to § 405(h) was not intended to
give bankruptcy courts jurisdiction over issues involving
Medicare.16 Thus, Congress's failure to include
28 U.S.C §§ 1332 and 1334 in § 405 (h) of the
Medicare Act has been viewed by many courts as
inadvertent.17

Courts have supported this conclusion by noting that Medicare
claims are highly regulated and recognizing that the underlying
issues frequently involve the health and safety of patients; as
such, courts have found that administrative agencies are best
equipped to make these decisions, rather than bankruptcy courts. In
Parkview,18 the First Circuit agreed that
because these kinds of claims are highly regulated, they are best
left to administrative agencies and there was no violation of the
automatic stay. The First Circuit affirmed the bankruptcy and
district courts' decisions based on this narrow focus and chose
not to address the implications of § 405 (h) of the Medicare
Act. The court held that the government's termination of the
provider agreement was not a violation of the automatic stay based
solely on the police and regulatory exception, and thus did not
decide whether the bankruptcy court had jurisdiction to compel the
assumption of the provider agreement.19

Parkview Adventist Medical Center was a hospital in Brunswick,
Maine, that provided emergency services, inpatient services and
outpatient services.20 Parkview maintained the
Medicare provider agreement with the Centers for Medicare and
Medicaid Services (CMS) (a part of HHS), which contained certain
conditions with which Parkview had to adhere to receive
reimbursements from Medicare for both inpatient and outpatient
services.21

On June 15, 2015, Parkview sent CMS a letter stating that it
would be filing for chapter 11, would be closing the hospital, and
would no longer participate in the Medicare program, effectively
ending its participation in Medicare.22 On June 16,
2015, Parkview filed its chapter 11 petition.23
Three days later, CMS responded to Parkview's letter, stating
that it would terminate the provider agreement as of June 18, 2015,
because Parkview "no longer meets the definition of [a]
'hospital,' as outlined in Section 1861 (e) of the Social
Security Act."24 On June 19, 2015, Parkview
informed CMS that "it was not terminating the Provider
Agreement and that CMS' [s] decision to terminate the agreement
would adversely affect Parkview's bankruptcy transition
plan."25 CMS indicated that it would rescind
the termination of the provider agreement only if Parkview began
admitting patients again for inpatient
services.26

On July 9, 2015, Parkview filed a motion to compel post-petition
performance of executory contracts,27 including the
provider agreement. Parkview argued that the provider agreement was
an executory contract under § 365 of the Bankruptcy Code and
CMS's termination was a post-petition termination in violation
of §§ 362, 365 and 525 of the Bankruptcy Code. Both the
bankruptcy and district courts agreed that § 405 (h) of the
Medicare Act barred the court from exercising jurisdiction over the
motion to compel because Parkview did not exhaust its
administrative remedies and CMS did not violate the automatic stay
or non-discrimination provision of the Bankruptcy Code by
terminating the provider agreement.28

On appeal, the First Circuit chose not rule on whether the
bankruptcy court had jurisdiction to determine whether Parkview
could assume or reject the provider agreement under § 365 of
the Bankruptcy Code. For purposes of deciding the appeal, the court
assumed that it had "hypothetical jurisdiction" and
denied Parkview relief based on a finding that CMS had not violated
the automatic stay by terminating the agreement.29
The First Circuit found that in this scenario, the "police and
regulatory power" exception to the automatic stay applies; CMS
did not violate the non-discrimination provisions of the Bankruptcy
Code.

CMS had argued that (1) the provider agreement was not
"property of the estate" in that Parkview did not have a
"cognizable property or contractual interest in participating
in Medicare without meeting Medicare's conditions of
participation"; (2) the automatic stay did not apply because
the termination was "non-final"; and (3) even if the
automatic stay applied, the "police and regulatory power"
exception to the automatic stay would apply.30

To determine whether the exception applied, the First Circuit
made two inquires: (1) whether the government action was
"designed to protect the public safety and welfare"; or
(2) "if the action [was an] attempt to recover property from
the estate."31 If the action had a
"pecuniary purpose," the court found that it would be
subject to the automatic stay.32

Unlike in Bayou where the government found repeated
violations of the conditions of the provider agreement that
threatened the health and safety of patients, Parkview argued that
the government's "termination was not based on a finding
of a threat to the health or safety of patients." Therefore,
the policy and regulatory exception should not
apply.33

The First Circuit found this argument irrelevant because the
question was "whether CMS's termination enforces a
generally applicable regulatory law or furthers a public policy
interest beyond the contractual rights in the Provider
Agreement."34 Therefore, the application of the
police and regulatory exception to the automatic stay did not
depend on whether Parkview's actions threatened the health or
safety of the patients. The court noted that Parkview had actively
taken steps to disqualify itself as a hospital, rendering it unable
to provide necessary services, a required condition under the
provider agreement. As such, it would have been a waste of public
resources to not terminate the agreement.35

Based on these cases, it is clear that even if the bankruptcy
court does have jurisdiction under the statute to bar the
termination of the provider agreement, courts are mindful of the
precarious issues that are raised in health care and hospital
cases. Despite the arguments by both Bayou and Parkview that if
bankruptcy courts lack jurisdiction to adjudicate Medicare-related
issues, a provider's potential reorganization will be
jeopardized, the courts seemed sensitive to substituting the
judgment of the bankruptcy courts for that of the administrative
agency.

This jurisdictional issue is ripe for resolution by the Supreme
Court. Indeed, on Feb. 2, 2017, Bayou filed a petition for writ
of certiorari asking the Court to determine whether § 405
(h) of the Medicare Act bars bankruptcy and district court
jurisdiction over Medicare claims.36 The time to
file a response to the petition has been extended to May 5, 2017.
Even so, the Supreme Court's ruling may not be dispositive.
Based on the First Circuit's decision in Parkview, if
the Supreme Court sides with the Ninth Circuit and decides that
§ 405 (h) of the Medicare Act does not bar bankruptcy
jurisdiction, CMS might still be able to terminate provider
agreements without bankruptcy court approval as a result of the
police and regulatory powers exception to the automatic stay.

8 See In re Town & Country Home Nursing
Servs., 963 F.2d 1146, 1155 (9th Cir. 1991) (holding that
"Section 405(h) only bars actions under 28 U.S.C. §§
1331 and 1346; it in no way prohibits an assertion of jurisdiction
under section 1334").

30 Parkview Adventist Med. Ctr., 842 F.3d at
763. The policy and regulatory power exception to the automatic
stay is embodied in § 362 (b) (4), which provides that the
automatic stay does not apply to "an action or proceeding by a
governmental unit ... to enforce such governmental unit's ...
police and regulatory power." 11 U.S.C. 362(b)(4).

A noteholder appealed, arguing, among other things, that the plan unfairly discriminated against his class of claims since other unsecured creditors in separate classes would receive 100 percent recovery.

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